Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

How New York Compares to Other States

New York has less than 7 percent of the U.S. population, but spends about 14 percent of the nation’s Medicaid dollars.51 The average New Yorker spends more on Medicaid (through taxes) than the average citizen of any other state. The state also spends more on each Medicaid enrollee than almost any other state. Including federal, state and local spending, in 2004, the latest year for which complete data is available:52

New York spent $10,349 per Medicaid enrollee, compared to the nationwide average annual cost of about $6,834. [See Figure VIII.] Only New Hampshire spent more.

New York Medicaid spent about $2,165 for every man, woman and child living in state — more than any other state and almost two-and-one-half times the national average of $873.

“New York spends more per Medicaid enrollee than almost any other state.”

Why Does New York Spend So Much More Than Other States? Some might assume that Medicaid costs are higher in New York because the cost of living is higher than in other states, especially in New York City. However, we compared New York City to Columbus, Ohio, where the local cost of living is at the average for the nation as a whole. The findings:53

In fiscal year 2003-2004, Medicaid spending in New York City averaged $9,842 per enrollee, almost twice as much as the $5,082 spent in Franklin County (Columbus).

Adjusted for the cost of living in each area, New York City spending per enrollee was still twice as high as in Columbus, Ohio.

Thus higher living costs do not account for the relatively high Medicaid spending in New York.

New York spends more because of policies that encourage higher spending and discourage cost control. Other states share some of these same problems, but none have such a wide array of perverse incentives. Specifically:

Unlike most other states, New York offers coverage to virtually all optional populations and covers virtually all optional services.

New York underpays physicians and overpays hospitals, even though physician therapies are often more cost effective than hospital therapies.

New York does not use smart buying techniques, such as selective contracting, to reduce costs.

Compared to other states, New York pays premium prices for drugs and imposes few restrictions on doctors who prescribe the most expensive drugs, when lower-cost alternatives are often just as effective.

The political incentives to spend are greater since the New York legislature bears only a fraction of the cost (less than almost any other state) of the benefits it confers; a substantial share of the cost is borne by county property-taxpayers in addition to federal taxpayers.

New York does not aggressively pursue fraud — even failing to spend a substantial portion of the federal funding available for antifraud efforts.

New York’s insurance regulations raise the cost of private insurance, and make (free) Medicaid coverage more attractive.

Let’s look at how each of these features of the system raises costs.

Costly Policy: Offering More Benefits to More People. One reason New York Medicaid is so costly is that the state covers virtually all optional populations and provides virtually all optional benefits.54 Medicaid covers an estimated 4 million New Yorkers,55 or one in every five residents. New York has a higher proportion of residents in Medicaid than most states — about 50 percent more than the national average (21 percent versus 14.3 percent).56

There are 35 optional Medicaid services for which the federal government will provide matching funds. New York provides 31 of these services. These include, for instance, podiatry, which is only funded in 26 other states. Only 17 other states fund “personal care” and only 15 others offer private duty nursing.57 [For a list of optional benefits, see Appendix Table IIa-c.]

“New York covers virtually all optional populations and benefits.”

Following is a detailed discussion of three of these optional benefits that are widely utilized in New York: long-term or nursing home care, home care and personal care, and transportation services. Long-term care is an optional benefit every state provides, but the New York program is unusually costly. In other states, home and personal care substitute for more expensive institutional care, but all three types of benefits are utilized in New York to a greater extent than other states. Finally, New York provides the most extensive, and expensive, transportation services of any state.

Optional Benefit: Long-Term Care. Among the optional benefits New York provides is long-term care. Although every state provides some nursing home benefits, New York spends more than the average state on institutional long-term care.

About 17 percent of the Medicaid money spent on long-term care in the United States is spent in New York.58

Nationally, Medicaid pays for two-thirds of nursing home care; in New York it pays for more than three-fourths of nursing home care (78 percent).59

What accounts for the higher spending on long-term care? One reason is that New York Medicaid has a higher proportion of blind, aged and disabled beneficiaries than the U.S. average — accounting for nearly one-third (32 percent) of its enrollees compared to the national average of 24 percent.60 Adding to this is the higher labor and long-term care costs in New York City. A comprehensive study of all the states by the federal government found that nursing homes in New York state were about 46 percent more expensive than the national average, and even after adjusting for differences in the cost of living are approximately 29 percent higher than the national average.61 Another study of metropolitan areas found nursing home costs in New York City were more than double that of other major cities.62

“One-fourth of all Medicaid personal care dollars are spent in New York.”

Optional Benefit: Personal and Home Care. Another widely utilized benefit is personal care and home care. Personal care, sometimes referred to as “custodial care,” generally involves assistance with activities related to daily living (bathing, toilet assistance, eating and housekeeping). Home care can also include assistance with daily living activities, but also includes skilled nursing.63 Some 13 percent of New York Medicaid enrollees utilize personal care and 8 percent use home care, compared to a nationwide average of 11 percent and 2 percent, respectively.64 And, according to the Citizens Budget Commission — a taxpayer watchdog group — New York provides much more home care than any other state:65

Whereas those receiving home care benefits in other states get helpers an average of 11 hours per week, the average is 30 hours per week in New York.

Average spending on personal care per capita is $18.11 across the country, but New York spends $91.21, more than four times as much.

Overall, fully a fourth of all Medicaid dollars spent on personal care nationwide are spent in New York!

Home health aides typically come once a day to wash dishes, perform light cleaning, deliver or prepare meals, and help with bathing and dressing. Enrollees often begin receiving personal care after discharge from a hospital, when a Medicaid official assesses their level of disability and calculates the number of hours of assistance they need for daily living activities.

Once recuperated, most recipients have come to expect the higher level of service they were receiving (due to illness) and resist having the number of hours of personal care assistance cut back. If clients complain, the system generally favors clients over administrators. In New York, Medicaid enrollees often use home care attendants for nonmedical tasks such as shopping. Furthermore, in some cases, assistants are chosen by the recipients themselves, and can include other members of the household, relatives or neighbors. Thus, Medicaid often pays family members to do what they would have done anyway.

Home- and personal-care services may be justified when they allow the disabled or frail seniors to avoid institutional care, but many New Yorkers receiving home care could perform more of the tasks themselves and are receiving more assistance than is needed to keep them out of institutionalized care. Thus, apart from skilled nursing services, home care often amounts to free maid service.

Optional Benefit: Transportation. New York also provides such nonmedical services as transportation. For example, New York Medicaid pays for wheelchair-accessible vans (called ambulettes) to transport Medicaid enrollees with mobility problems to and from medical treatments. The service is intended to provide transportation only to those who use wheelchairs or who cannot walk without assistance. But most of those taking ambulette rides have no mobility problems and, for them, the service is actually a free taxi service. In 2005, the New York Times reported:66

Two doctors each ordered more than 90 trips per day for patients.

At another clinic, one patient used the service 153 times in a single year while another patient used the service 152 times — about one ride every two-and-one-half days.

Other patients used the service more than 130 times.

“New York pays $60 to transport patients who could ride a bus for $2.”

For patients who qualify for the service, cheaper alternatives exist. A typical bus ride in New York City costs $2 and a taxi ride costs $10, according to the New York Times. But Medicaid typically pays contractors $25 or $31 each way to transport patients to their appointments in an ambulette. Overall, New York Medicaid spent $316 million to transport patients to doctors' offices and hospitals in 2003. This works out to 10.5 million to 12.5 million rides per year.67

Costly Policy: Underpaying Physicians and Overpaying Hospitals. Routine examinations and treatments — including minor surgical procedures — can be provided more efficiently in a doctor's office than a hospital. But many doctors who could provide such services do not do so. They do not participate in Medicaid because reimbursement is so low. As a result, the patients turn to much costlier settings, such as hospital clinics and emergency rooms.

The Effects of Underpaying Physicians. Medicaid reimbursement rates for physicians are typically lower than what physicians receive from the private sector in every state. But in New York the discrepancy is even greater. In fact, New York has some of the lowest physician payment rates found anywhere in the country. For instance:68

New York doctor receives $30 for a visit by an established patient requiring a highly complex exam, whereas Mississippi pays a physician about $100 for the same exam. [See Table II.]

An eye doctor in New York receives $30 for a comprehensive examination of a new patient, whereas Texas and Florida pay more than twice as much for the same service.

“New York underpays physicians.”

Another way to think about Medicaid physician payments is to compare them to what Medicare pays:

Medicare pays physicians only 83 percent as much as private insurers, on the average, nationwide.69

Medicaid fees for physician services are 69 percent of what Medicare pays, nationwide, according to the American Academy of Pediatrics,70 and perhaps as little as 62 percent, according to an Urban Institute estimate.71

By contrast, in New York, Medicaid pays physicians only about 45 percent of what Medicare pays.72

Only two state Medicaid programs — in New Jersey and Rhode Island — pay physicians so little compared to Medicare. In New York City, for instance, Medicaid will only pay a specialist $30 for a consultation of moderate complexity, while Medicare pays $200.73 Medicaid physician payments also vary by type of service. For example:74

New York Medicaid pays 65 percent of what Medicare pays obstetricians.

It pays primary care providers only 40 percent of what Medicare pays.

Other specialists are only paid about 31 percent of what Medicare pays.

“Hospital care substitutes for physician visits.”

These reimbursement rates affect access to care. Laurence C. Baker and Anne Beeson Royalty found that a 10 percent increase in Medicaid fees raised the number of poor patients visiting office-based (private) physicians by 3.4 percent, and correspondingly reduced the number visiting public physicians (such as in public health clinics) by 3 percent. 75 When physicians are rewarded for taking complex cases, they have an incentive to accept them. When fees are not adjusted for the complexity of the case, they have an incentive to avoid complex cases.

“New York spends nearly three times as much as the average state on hospital care.”

The Effects of Overpaying Hospitals. When access to private physicians is limited, patients rely more on inpatient treatment. In New York state, 18 percent of Medicaid patients receive inpatient care compared to just 11 percent nationally.76 [See Figure IX.] Furthermore, in contrast to its treatment of physicians, New York pays hospitals generously. When New York deregulated the hospital industry in 1997, the system of Medicaid fee-for-service was left largely intact, allowing Medicaid enrollees to go to any hospital, regardless of its efficiency. Consequently, Medicaid began to pay the highest fees of any payers — including private insurers.77 In most states Medicaid pays the lowest fees of any payer.

This generous payment policy does not give hospitals any incentive to increase productivity or reduce costs. As a result, in 2003, New York Medicaid paid about $10 billion to hospitals for inpatient care, subsidies for graduate medical education and hospital-based clinics — more than any other state Medicaid program. Furthermore:

New York spends nearly three times as much per state resident on inpatient care ($530) as the national average ($185).78 [See Figure X.]

The inpatient cost per Medicaid enrollee in New York is also greater than in other large states — $1,794 in 2003, compared to $725 in Texas, $815 in California and Ohio, and $884 in Florida.79 [See Figure XI.]

For instance, some New York hospitals have high fixed operating costs — due to a large number of empty beds. (Empty patient rooms generate no revenue, but incur costs — such as heating and cooling.) In fact, New York has 21 percent more hospital beds per capita than the national average. Statewide, about 9,100 hospital beds were eliminated from 1990 to 2005, but experts suggest that closing another 20,000 beds would make the system more efficient while meeting the demand for beds.80 New York has somewhat reduced excess capacity, but instead of closing the most inefficient and underutilized hospitals, it has closed a few beds at a number of hospitals.81

“New York spending per patient is higher than in other large states.”

Furthermore, average administrative costs in New York hospitals are more than 13 percent higher than the national average and the cost of patient care is nearly 10 percent higher — after controlling for case severity and higher regional labor costs.82 For similar cases, Medicaid-paid hospital stays in New York cost about 30 percent more than the national average.83 [See Figure XII.] And patients spend 37 percent longer in the hospital, on the average, than patients with similar conditions in other states.84

“New York spends 30 percent more than average on similar cases.”

Costly Policy: Ineffective Managed Care. Managed care was introduced into Medicaid in order to increase access to care, and to provide services efficiently. In New York City, Medicaid managed care has done a poor job of pursuing both goals.85

Managed care organizations usually contract with area hospitals and doctors to provide services at negotiated discounts. However, most New York City Medicaid managed care plans are administered by large public hospitals, which are the primary providers of health services.86 These organizations do not have the same incentives to control costs as private sector insurers. For instance, a private sector insurer would seek to hold down the cost of caring for enrollees by contracting selectively with health care providers who were efficient at providing specific services. Yet a public charity hospital that has contracted to care for the same group has the incentive to perform all medical services in-house even if its facilities are not as efficient at providing some medical services as other hospitals. Even if the hospital is inefficient and losing money, keeping all medical services in-house minimizes loses. Whereas a nonprofit or for-profit health plan would go out of business, a charity hospital often uses political clout to increase subsidies.

Furthermore, most New York City public charity hospitals lack large networks of participating physicians and have to rely on outpatient clinics affiliated with the hospital.87 As a result, access to physicians is less convenient and many enrollees cannot see the same doctor each time they schedule an office visit. This reduced access to primary care physicians often leads to over-use of emergency departments in situations when a physician office visit would have been less costly.

Most states, including New York, have enrolled a significant proportion of their Medicaid beneficiaries in managed care plans. However, like most states, New York exempts substantial patient populations from its mandatory managed care enrollment: the elderly and disabled. Seventy percent of Medicaid costs in New York are for the elderly and disabled. The average yearly cost per person to care for them is 10 times higher than for nondisabled children and five times the cost of caring for the parents of nondisabled children. Exempting the most intensive users of Medicaid services from cost-control efforts is an expensive missed opportunity. These patient groups have problems accessing care, and could benefit from the continuum of care and case management that managed care networks can offer. For many of them, managed care is not even available on a voluntary basis.

Uniquely, New York applied for and received a special waiver to allow managed care plans, community groups and clinics to recruit new enrollees and help them fill out the enrollment forms. This process, known as “facilitated enrollment,” makes it easier to sign up ineligible people and gives HMOs the ability to steer enrollees to their own firms.88 It also allows managed care contractors to sign up less costly patients and avoid more costly ones.

An alternative to managed care is to allow patients to manage their own health care dollars and shop for care as empowered consumers in the medical marketplace. We will consider this option below.

“New York spends more on drugs than any other state.”

Costly Policy: Paying Premium Prices for Drugs. New York spends more on drugs than any other state — about $3.413 billion in 2002.89 It also pays higher average prices for drugs than any other state except New Jersey.90 And it spends more on drugs per enrollee than any of the other 10 most populous states, at about $957 per enrollee.91

Why? One reason is that the New York state program provides few incentives for enrollees to economize on drug costs, despite evidence that there is wide variation in prices for the same drug as well as less expensive generic and therapeutic alternatives for many drugs.92 Furthermore, according to a 2004 Inspector General's report, New York consistently paid some of the highest prices of any state for Medicaid drugs.93 For instance:

New York pays $3.67 per dose for the acid reflux drug Omeprazole even though an identical drug, Prilosec, is available over-the-counter for about 75 cents per dose.94

New York paid $18.70 per container of the asthma drug albuterol while Texas Medicaid only pays $6.63.

Another reason for New York 's high drug costs is that the state does little to restrict the drugs for which it will pay. Many private health plans have some type of preferred drug list with increased cost sharing for drugs that have significantly cheaper alternatives. Most state Medicaid programs have a drug formulary, which is a list of prescription drugs for which the program will pay. The drugs are selected through a competitive bidding process, and drug companies usually agree to reimbursement rates that are steeply discounted from the retail price. Many states will only include one drug from a class in the formulary. Another way to save money is negotiating discounts with drug manufacturers.95 New York has taken steps to reduce drug spending, but their efforts have lagged behind other states and have so far been ineffective. It recently began encouraging the use of generic drugs, but doctors can easily substitute higher-priced brand drugs.96

“The State of New York pays $1 for every $4 in benefi ts it confers.”

As with other types of managed care there is a danger that drug formularies can become bureaucratic obstacles that prevent patients from getting the drugs they need. Also, administrators may be tempted to sacrifice quality care in order to reduce costs. Ideal drug policy minimizes costs without harming patient welfare. Poor drug policy harms patients and may (because of adverse health effects) not even reduce costs.97 Frank Lichtenberg of Columbia University has found that newer, more expensive drugs may offer more effective treatment and reduce total health care costs. Lichtenberg found that lowering the average age of drugs used by roughly a decade (that is, from 15 years to 5.5 years) results in an increase of $18 in drug spending but a net reduction in total health care spending by $111. Most of the net reduction was due to decreased hospitalizations and fewer office visits. 98

“Counties have cut services and raised taxes to pay for Medicaid.”

Costly Policy: Shifting the Cost of State Mandated Benefits onto Local Governments. One reason for the higher cost of New York Medicaid is the unusual way in which the program is financed. Unlike other states, New York requires its counties to pay a substantial portion of Medicaid costs.99 Figure XIII shows the break-down of New York Medicaid funding. Counties bear about 17 percent of the total cost of Medicaid. New York City's local contribution is another 8 percent of the total. The federal government pays half the cost. Thus the State of New York pays only one-quarter of the cost of Medicaid.

For every dollar the state spends, it can confer $4 of benefits. Politicians, therefore, are tempted to continue to confer benefits paid for by someone else. This means the state has much less incentive to economize.100 As a result, New York State spends about 28 percent of its budget on Medicaid — plus the counties' spending — compared to about 22 percent of state budgets nationally.101 [See Figure XIV.]

According to the New York Times , many counties raised taxes more than 40 percent from 2003 to 2005. For instance, taxes in Albany County increased by about 70 percent over the past few years — largely to pay its share of Medicaid costs.102 To pay their Medicaid bills, some New York counties have cut other services:103

Sparsely populated Chemung County closed a library two years ago.

Chautauqua County cut back on bus routes and sheriff's deputies.

Oswego County reduced its work force by 16 percent and sold its nursing home.

In 2005 Niagara County cut 96 staff positions.

Since property taxes are the main source of county revenue, Medicaid has caused substantial property tax increases. 104 According to the Public Policy Institute of New York, taxpayers living in upstate New York pay nearly $1 billion a year in additional taxes compared to an average state due to Medicaid.105 This has negatively affected the state's economy.106 County leaders complain the tax rate is slowing business development. A 2004 Moody's Investors Service report claims that counties in New York are facing financial trouble because of increasing costs, including employee wages and benefits, and the counties' share of Medicaid.107

Costly Policy: Ignoring Fraud. As noted above, 10 percent of Medicaid spending nationwide may be lost to fraud.108 In New York, a former State Inspector General estimates that waste and unnecessary services that don't rise to the level of criminality may add another 20 to 30 percentage points to this amount.109

“New York Medicaid spending equals more than one-third of the state budget.”

The New York Times found massive fraud merely by analyzing data obtained through the Freedom of Information Act. The state has failed to try reforms that other states have used successfully. It has also failed to pursue cases when fraud is found.110 A 2000 press release from the Office of the New York State Attorney General illustrates the size of the problem. On the occasion of the 25th anniversary of the New York Medicaid antifraud unit, Attorney General Eliot Spitzer's office announced a total of $326 million in fines, overpayments and restitution had been recouped since the unit's inception 25 years earlier.111 Yet the amount they recovered in two-and-a-half decades was equivalent to only about 7 percent of the estimated cost of fraud that occurred in 2005. In the past 15 to 20 years, the number of people dedicated to fighting Medicaid fraud in New York has fallen by about 70 percent. Interestingly, the amount of money recovered by the antifraud team has fallen by about that same percentage since 2000.112 In 2004, New York Medicaid paid about 400 million claims, but only 37 cases of suspected fraud were uncovered.113

Other states are far more aggressive in rooting out fraud. In recent years California added about 400 people to its antifraud staff. The Medicaid budgets in Ohio and Illinois are only about one-quarter of the budget in New York, but they audit three times as many providers each year.1140 The federal government is willing to pay 75 percent of the cost of beefed-up state antifraud efforts, but New York does not spend enough to receive the full federal match.

“New York uncovered only 37 cases of fraud in 2004.”

Until recently, New York counties were not allowed to police the Medicaid providers within their areas, even though they pay a significant portion of the costs. They could not investigate doctors and providers who where bilking the program with questionable billings, and were not even allowed to find out what local providers were billing Medicaid for services.115 The state alone had the power to investigate fraud. Unfortunately, the state has done a dismal job.116

In the fall of 2005, the New York State Department of Health finally allowed 12 counties to look for unusual patterns in billings from Medicaid providers that might indicate fraud.117 After examining just a small portion of the program, investigators in Rockland County discovered what appeared to be $13 million in questionable charges over a period of less than two years.118 Even when patterns of fraud are found, local officials are not allowed to prosecute, sue or even suspend the providers. Only the state Department of Health has that authority.119

Costly Policy: Crowding Out Private Insurance . As noted, Medicaid crowds out private insurance coverage by offering a free alternative. New York exacerbated this effect by enacting two regulations in 1993 that raised the cost of private insurance : community rating and guaranteed issue . These laws allow people to obtain insurance once they become ill (guaranteed issue) and require insurers to charge the same price regardless of age and health status (community rating). As a result, young, healthier people are substantially overcharged for their insurance while older, sicker people generally pay less than their true cost of care. For instance:

Just prior to enactment of these laws, a New York family of four headed by a 30-year-old could obtain coverage for about $4,000 per year.

Immediately after enactment, that family's cost rose to $7,680.

After a decade of premium increases, health insurance now costs the same family about $11,000.120 [See Figure XV.]

Conversely, in 1993, a family headed by a 60-year-old paid $11,640 annually. Immediately after guaranteed issue and community rating were enacted this fell to $7,680 and 10 years later stood at about $11,008. So, in effect, the expected health care costs of the older, more-expensive-to-treat couple was shifted to the younger, healthier couple.

“Insurance regulations raise the cost of private coverage.”

Defenders of these laws claim that they protect consumers by guaranteeing access to coverage — especially for those who are ill and need care the most. But the only people who have an incentive to purchase coverage are those who are ill. After all, why pay premiums when you are healthy if you can always insure (at the same rate) after you get sick. But if only ill people join a health insurance pool, the cost per person will be enormously high. As more and more healthy people drop insurance and those remaining in the pool are sicker and more expensive to treat, premiums must be raised. This creates an incentive for the young and the healthy to drop their coverage or to avoid buying insurance in the first place. One study found that community rating and guaranteed issue in the small group market increased the likelihood of being uninsured by more than 28 percent.121

The Politics of Medicine. We have seen that Medicaid spending in New York is unusually high. But why do taxpayers and policymakers tolerate such high costs? New York City has an especially large number of medical schools, teaching hospitals and research centers. Higher Medicaid reimbursement rates for hospital services pay for these resources.122 New York labor unions are powerful, and hospital labor is well paid.123 In 2002, the New York State legislature increased Medicaid reimbursements for hospitals in order to raise the wages of certain health care workers.124 Although recruiting and retaining health care workers might sound like a worthy goal, the move was largely due to strong health care unions that primarily represent low-skilled workers.125 About 10 percent of New York's nonagricultural workforce (800,000 people) is employed in health care, making providers politically powerful opponents of reform.126

Whenever fiscal restraint is suggested, reform opponents fight tooth and nail to derail the process. In 1999 the Service Employees International Union local 1199 and the Greater New York Hospital Association launched an expensive lobbying campaign warning of huge layoffs and closed hospitals.127 Again, in 2005, when Gov. Pataki announced plans to restrain Medicaid costs, the same union and the Greater New York Hospital Association ran advertisements using scare tactics to attack the plan.128